India's Mobile Telecom Industry

March 30, 2012, 6:48 a.m.

The mobile telecoms industry is one of India's biggest success stories, alongside outsourcing. However, this once fast growing industry is now quickly maturing, with sedate growth and high levels of debt from previous license auctions. All the Indian operators except Bharti Airtel, make low returns on their mobile telecom capital inside the country. Nevertheless, Crisil, a credit rating agency, announced last month that Indian mobile operators' operating profitability could increase by 5% in the next two years.

The credit rating agency believes competitive intensity in the Indian mobile telecoms sector will decrease from the highs of mid-2011 after the February cancellation of the 122 mobile licenses between eight companies for India's 2G spectrum.

Furthermore, improved pricing power as key players such as Bharti Airtel, Vodafone, Idea, Reliance Communications, and Tata Teleservices increase tariffs in certain areas will improve profitability. Crisil judges the majority of the 5% increase in profitability will be generated from these tariff hikes. Additionally, companies will be able to generate substantial extra revenues from data services, such as 3G and value-added services.

Another key factor: these companies will be able to reduce their average capital expenditures (CAPEX), compared to the past. Most of these companies already have good coverage in high population areas and have outsourced large parts of their passive infrastructure requirements. Greater returns from their operations, combined with lower CAPEX will enable them to reduce their debt and leverage over the next two-to-three years.

Fraudulent documents, secret recordings, retroactively changing deadline dates, front companies, and many more abuses led to India's Supreme Court canceling all 122 mobile licenses on February 2
nd
. Of the previous 122 mobile licenses granted, 85 went to six new entrants, including several property firms, two of which promptly made fortunes by selling stakes in the licenses to foreign companies. In 2009, after a year, India's Comptroller and Auditor General found that none of the six had met its original obligation to roll out a network.

As you can imagine, this has caused chaos in theIndian telecom industry.The cancelled spectrum will be returned within four months (in June 2012) and auctioned off fairly, as the 3G auction was conducted in 2010 - and widely admired. The aim will be to cause minimum disruption to the 67 million customers using the mobile spectrum and almost a third of India's 2G spectrum capacity, as well as restore confidence to the overall telecom industry.

Nevertheless, there are still uncertainties about a potential new regulatory framework that will be a significant factor in the success of the Indian mobile telecom companies.